Financial Reporting Rainyday Ltd

Question: Discuss about the Financial Reporting for Rainyday Ltd. Answer: Introduction: Rainyday Ltd. has decided to change the estimated life of the equipment. This change will cause the depreciation rate to change also, as in the straight-line method, the estimated life of the assets is the main base of depreciation rate and amount. Such event can be classified as Change in Depreciation Rate. Under AASB 116, such change of depreciation rate of any asset should be balanced with the net profits and tax liabilities of the previous years. The net profit accounts of the previous years were closed by including it in retained earnings and the previous years tax liabilities are adjusted by creating deferred tax assets or liabilities. The journal entries in the books of Rainyday Ltd., required for the change of depreciation amount are shown in the following table: In the Books of Rainyday Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount a) Revaluation of Machinery 1/7/2015 Retained Earnings A/c. Dr. 23333 Deferred Tax Assets A/c. Dr. 10000 To, Accumulated Depreciation A/c. 33333 30/06/2016 Depreciation A/c. Dr. 66667 To, Accumulated Depreciation A/c. 66667 Income Statement A/c. Dr. 66667 To, Depreciation A/c. 66667 Workings :- Date Particulars Amount Effective Life Estimated Value 1/7/2013 Value of Machine 500000 10 500000 30/6/2014 Less: Depreciation 50000 1/7/2014 Value of Machine 450000 9 450000 30/06/2015 Less: Depreciation 50000 1/7/2015 Value of Machine 400000 6 400000 30/06/2015 Less: Depreciation 66667 The unrecorded expenses of previous year, paid in the current year, are considered as the Event after Reporting Period. According to AASB 110, such expenses should be adjusted with the retained earnings, as it contains the net profits of the previous years. The tax liabilities of the previous years should also reduce due to the unrecorded expenses. Hence deferred tax asset accounts is created for adjusting the reduction of tax liabilities, caused by the payment of the unrecorded expenses in the current year. Rainyday Ltd. should post the following journal entries for the mentioned adjustment:- In the Books of Rainyday Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount b) Adjustment for Unrecorded Expenses: 5/7/2016 Repairs A/c. Dr. 25000 To, Bank A/c. 25000 30/06/2016 Retained Earnings A/c. Dr. 17500 Deferred Tax Assets A/c. Dr. 7500 To, Repairs A/c. 25000 30/06/2016 Income Tax Payable A/c. Dr. 7500 To, Deferred Tax Assets A/c. 7500 The assets are normally revalued when the value of the assets changes permanently. The stocks prices use to change every day and temporary. Therefore, Rainyday Ltd. does not require to adjust the change in the value of stock prices as per the market prices in its books of accounts. AASB 137 describes the accounting procedures for provision for doubtful debts. As per the accounting standard, the bad debt should be adjusted with the provision for doubtful debt and if any deficiency occurs in the provision due to excess bad debt in comparison to the estimated bad debt, then it should be adjusted with the Income Statement. The necessary adjustment entries for Rainyday Ltd, in this case, are shown below:- In the Books of Rainyday Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount d) Provision for Bad Debt: 20/06/2016 Bad Debt A/c. Dr. 900000 To, Masterz Ltd. A/c. 900000 20/06/2016 Provision for Doubtful Debts A/c. Dr. 900000 To, Bad Debt A/c. 900000 30/06/2016 Income Statement A/c. Dr. 450000 To, Provision for Doubtful Debts A/c. 450000 In the Books of Sunny Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount 31/01/2016 Bank A/c. 18930000 Share Application A/c. 18900000 Share Option Reserve A/c. 30000 Share Application A/c. 18900000 Share Capital A/c. 18000000 Share Allotment A/c. 900000 12/2/2016 Share Allotment A/c. 6000000 Share Capital A/c. 6000000 12/3/2016 Bank A/c. 5080000 Calls-in-Arrear A/c. 20000 Share Allotment A/c. 5100000 20/03/2016 Share Capital A/c. 80000 Calls-in-Arrear A/c. 20000 Share Forfeiture A/c. 60000 5/4/2016 Bank A/c. 74000 Share Forfeiture A/c. 6000 Share Capital A/c. 80000 Share Forfeiture A/c. 54000 Cost of Re-issue A/c. 3600 Share Applicants A/c. 50400 Cost of Re-issue A/c. 3600 Share Applicants A/c. 50400 Bank A/c. 54000 30/06/2016 Share Option Reserve A/c. 12000 Share Capital A/c. 10000 alculation for Current Taxable Income Tax Liabilities:- Particulars Amount Amount Accounting Profit Before Tax 190750 Add: Depreciation on Equipment: Taxable Amount 60000 Accounting Amount -40000 20000 Depreciation on Motor Cycle: Taxable Amount 12000 Accounting Amount -15000 -3000 Government Grant -30000 Entertainment Expenses 4500 Prepaid Insurance -3000 Rent Payable 6000 Taxable Profit Before Tax 185250 Current Tax Liability 55575 Deferred Tax Worksheet:- Particulars Amount Tax Rate Deferred Tax Assets Deferred Tax Liability Difference in Depreciation on Equipment 20000 30% 6000 Difference in Depreciation on Motor Cycle -3000 30% -900 Government Grant -30000 30% -9000 Entertainment Expenses 4500 30% 1350 Prepaid Expenses -3000 30% -900 Rent Payable 6000 30% 1800 TOTAL 9150 -10800 In the Books of Blaze Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount Advance Tax on Sales A/c. Dr. 225000 To. Bank A/c. 225000 30/06/2016 Income Tax Expense A/c. Dr. 57225 Deferred Tax Assets A/c. Dr. 9150 To. Current Tax Liability A/c. 55575 To, Deferred Tax Liability A/c. 10800 Income Statement A/c. Dr. 57225 To. Income Tax Expense A/c. 57225 Bank A/c. Dr. 169425 Current Tax Liability A/c. Dr. 55575 To. Advance Tax on Sales A/c. 225000 In the Books of Sunshine Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount 1/7/2013 Equipment A/c. Dr. 800000 To. Bank A/c. 800000 30/06/2014 Depreciation A/c. Dr. 152000 To. Accumulated Depreciation A/c. 152000 Income Statement A/c. Dr. 152000 To. Depreciation A/c. 152000 1/7/2014 Accumulated Depreciation A/c. Dr. 152000 To, Equipment A/c. 80000 To. Profit on Revaluation A/c. 72000 30/06/2015 Depreciation A/c. Dr. 136000 To. Accumulated Depreciation A/c. 136000 Income Statement A/c. 136000 To. Depreciation A/c. 136000 Profit on Revaluation A/c. Dr. 72000 To. Income Statement A/c. 72000 30/06/2016 Depreciation A/c. Dr. 136000 To. Accumulated Depreciation A/c. 136000 Income Statement A/c. Dr. 136000 To. Depreciation A/c. 136000 1/6/2016 Accumulated Depreciation A/c. Dr. 272000 Loss on Revaluation A/c. Dr. 48000 To. Equipment A/c. 320000 Depreciation A/c. Dr. 18000 To. Accumulated Depreciation A/c. 18000 30/09/2016 Bank A/c. Dr. 390000 Accumulated Depreciation A/c. 18000 To. Equipment A/c. 400000 To. Profit on Sales A/c. 8000 Workings :- Date Opening Balance Residual Value Estimated Life Date Depreciation Closing Balance 1/7/2013 800000 40000 5 30/07/2014 152000 648000 1/6/2014 720000 40000 6 30/07/2015 136000 584000 1/6/2015 584000 40000 5 30/07/2016 136000 448000 1/6/2016 400000 40000 4 30/09/2016 18000 382000 Calculation of Impairment Loss:- Cinema DVD Sales Assets: $ $ Inventory 4,000 85,000 Furniture and fittings 250,000 35,000 Less: accumulated depreciation -45,000 -10,000 Electrical equipment 165,000 25,000 Less: accumulated depreciation -55,000 -15,000 Land and buildings 650,000 185,000 Less: Accumulated depreciation (buildings) -25,000 -6,000 Licence 25,000 - Goodwill 45000 15000 Carrying amount of cash generating unit 1,014,000 314,000 Fair Value, less, Cost of Sales 780000 318000 Value in Use 900000 290000 Recoverable Amount (Higher of Fair Value Value in Use) 900000 318000 Impairment Loss 114,000 0 Impairment Loss Exlg. Goodwill 69,000 0 Apportionment of Impairment Loss, Excg. Goodwill:- Particulars Amount Percentage Inventory 4,000 0.41% Furniture and fittings 205,000 21.16% Electrical equipment 110,000 11.35% Land and buildings 625,000 64.50% Licence 25,000 2.58% Total 969,000 1 In the Books of Movies Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount 30/06/2016 Impairment Loss A/c. Dr. 69,000 To. Goodwill A/c. 45000 To, Inventory A/c. 285 To, Furniture Fitting A/c. 14598 To, Electrical Equipment A/c. 7833 To, Land Building A/c. 44505 To, License A/c. 1780 Impairment Loss A/c. 4000 Accumulated Depreciation A/c. 6000 Land Building A/c. 10000 Bibliography: Deegan, C., (2013).Financial accounting theory. McGraw-Hill Education Australia Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., (2012).Financial Accounting. Pearson Higher Education AU Jakob, K., (2016) BFIN 429.02: Financial Management I-Theory and Analysis Neely Jr, P. and Muhammad, R., (2016). Fair Value Accounting on the Housing Crisis.Business and Management Studies,2(3), pp.1-8